110
110

Home Mortgage Payments Go Up for the First Time in Three Years

29 September 2017

A review of home mortgage payments in October will lead to an increase in charges for borrowers with loans tied to the three-month Euribor rate. The rise itself is small, but it is a sign. Mortgages linked to other indexes declined.

For the first time in more than three years, Portuguese families will see the burden of interest payments on their home financing loans increase. The rise will be minimal and will only affect loans tied to the three-month Euribor rate. The increase will also only affect loans up for review next month. Borrowers with loans linked to longer-term rates will continue to save on their payments, with added cuts to payments expected to result from the review in October.

A borrower who has taken on a loan of 100,000 euros, with a 30-year term, with a spread of 1%, and whose floating interest rate is linked to the three-month Euribor, will have their monthly payment set at 306.75 euros in October. The increase, when compared to the last revision in July, is equivalent to 0.01% or four cents. The added payment is minimal but symbolic. It is the first time since the March 2014 review that borrowers will be subject to a rise in financing costs.

Housing loans associated with longer-term indexes that are revised next month will, on the contrary, see continued decreases in payments. Assuming the same scenario as before, with contracts that use the six-month Euribor, the new monthly instalment will be 309.25 euros, 0.5% below the value set in the previous review, in April.

In turn, borrowers with loans associated with the 12-month Euribor will see the value of their payments reduced by 1.6% to 313.98 euros. These loans will be the last to be affected by a general reversal in interest rate trends, while the shorter 3-month Euribor linked contracts will already feel the change next month.

Are we on the verge of a new trend in home financing rates?

Portuguese families have not seen an increase in the burden of housing payments since April 2014. This is due to the European Central Bank’s accommodative policies following the onset of the financial crisis, which led the organisation led by Mario Draghi to set the benchmark Eurozone interest rate at a record low of 0% in March 2016. As a result, something unexpected happened, and Euribor rates entered negative territory, and remain there to this day.

Today the reality of the European economy is entirely different, and expectations are that the ECB will begin increase benchmark interest rates, although the entity headed by Mario Draghi did not signal, at the Bank’s last monthly meeting, when this might happen.

What is certain, is that the market is beginning to see likelihood an increase in the near term, with Euribor rate at a standstill in recent months. Futures markets show that housing loan interest rates are not expected to drop any further. In the case of three-month Euribor futures, the market indicates that interest rates will slowly increase, with market data pointing to an eventual return to positive rates, for the first time since April 2015, in September 2019.

While there are no guarantees, interest rates are likely to remain low for quite some time. The market is anticipating that short-term rates will only reach 0.5% in the middle of 2021.

Original Story: Economia Online – Catarina Melo

Translation: Richard Turner